Does Pay By Performance works with an Advertising Agency?

July 9, 2007

Here is an interesting one, and it is in response to some comments and emails which we received after our earlier post on pay by performance. Several comments came in based on the fact that they were concerned that spending money on marketing campaigns and advertisements could become an exercise in flushing money down the toilet.

True. If you have no idea what you are doing, what you want to achieve and you have an agency that is resonating at the same plane as you are, you might as well just give us the money now. We can flush it for you, easy.

But then, to “pay on results” is not as simple as it might appear. Marketing, advertising and communications is largely a skill based, creative industry; where the “products” are ideas and actions. Just as a beautiful fireworks display is over when its over, ideas exposed can not be taken back and re-used. Viewed in that light, I am sure you can see the challenges of a “pay by results” program.

There are parts of the program that are what we can consider as “sunk costs”. These are costs that any agency will incur no matter what. Being a service industry, it is rather difficult to quantify such costs. However, it is not impossible. The real costs that are hard to measure are the creative costs. Have you ever wondered why the “Mona Lisa” is worth millions and millions, while your rendition of Miss Universe 2007 (who of course, will look much better than Mona), is only appreciated by your little nephew? Will you pay the millions for Mona to smile at you? Not me. I have neither the means, nor the passion to spend my blood on that.

I would like to enumerate the various challenges that needs to be overcome before a “pay for results” approach is viable.

Objective Setting

Clear objectives must be established right from the beginning. Such objectives should include not just the intent of the campaign, but also clear, measurable results. Each item should be definitive. For example, sales revenue is a clear measure, top-of-mind-recall is a clear measure too. Whatever the metrics, these must be spelt out explicitly at the start. They cannot be made up as you go along. That is neither fair nor sensible.

Measurablility

When the objectives are clear, there is another hurdle to cross. Measurability. How do you measure the results of specific items? As an example, if sales revenue were the measure, is this all sales or just sales in the targeted market? How would that be measured in a consistent and objective manner?

On top of that, the results must be attributable to the campaign in question. Marketing noise like tactical sales offers from dealers, one-off promotions and other such actions could influence the results one way or another. To be fair, you would not want the results to be inflated and be misled, neither would the agency want it to be suppressed and get paid less.

Accountability

The marketing campaign is merely one cog in the complex web of this activity called a “business”. Deals, alliances, partnerships all affect the progress of the business. Whether the marketing, advertisement or event was responsible for the good (or bad) results, needs to be clearly defined. Again, such measurements and assignments should be made at the start, and not the end, of the exercise.

So, if you want to pay your advertising agency when you see the results, you will also have to be willing the pay the price of measuring the results in an objective and impartial manner. Proper cost accounting, systematic surveys and audits are just some of the systems you need to have in place for this to work well.

Having said all this, most of the time, it is impossible to get a clear enough consensus for this to work. For small companies, they will not have the proper control systems in place for a truly objective measure. The large companies prefer a known budget as opposed to a “moving target”. Advertising agencies of course, simply worry about getting paid their dues.

Its a tough world out there in Marketing. For the agencies, it is the fight for due respect and to get the piper’s pay. For the marketers, it is a struggle to get the best deal (in price and in results).

There is no single, simple answer. Most important is for each to find a trust-worthy partner, and work together. Don’t go it alone. Find a friend.